RATES ON THE RISE

WHAT IN­TER­EST RATE HIKES MEAN FOR FARM­ERS.

Successful Farming - - CONTENTS - By Betsy Freese, Ex­ec­u­tive Edi­tor

The Fed­eral Re­serve hiked in­ter­est rates in Septem­ber for the third time in 2018. That was the eighth rate in­crease since late 2015. An­other raise is ex­pected in De­cem­ber, along with three jumps in rates in 2019 and one jump in 2020. Here are eight points to keep in mind when you are think­ing about how in­ter­est rates may af­fect your farm.

1 Rates are still his­tor­i­cally low.

When the fi­nan­cial cri­sis hit in 2008, the Fed­eral Re­serve Open Mar­ket Com­mit­tee, or the Fed, set the fed­eral funds rate to 0% or .25% to in­flu­ence eco­nomic ac­tiv­ity and to bring the econ­omy back. It kept it there un­til De­cem­ber of 2015. The re­ces­sion was pro­longed and the re­cov­ery slow. Since then, it has in­creased rates a few times by .25% each time. It calls that “tight­en­ing mon­e­tary pol­icy.” That im­pacts the ab­so­lute short­est-term rate – the overnight rate.

The Fed took ac­tion in Septem­ber to in­crease that overnight rate from 2% to 2.25%. That is his­tor­i­cally still rel­a­tively low. As the econ­omy heats up, with new tax laws and low un­em­ploy­ment, the Fed is in­creas­ing rates be­cause it doesn’t want the econ­omy to over­heat and trig­ger in­fla­tion. This is be­ing done in a mea­sured pace, be­cause if it goes too quickly, that will sti­fle the econ­omy and the coun­try could go back into re­ces­sion again.

2 Long-term rates less af­fected.

Short-term type of loans such as re­volv­ing lines of credit and op­er­at­ing loans are go­ing to be im­pacted more than long-term loans, say, for home mort­gages. Farm­ers’ day-to-day op­er­a­tional funds, us­ing an open line of credit, are more im­pacted than their longert­erm bor­row­ing. They’re see­ing the big­gest im­pact on open lines of credit and very short-term bor­row­ing.

3

Ex­pect An­other rate hike this year.

The Fed has al­ready in­creased rates three times this year and will likely in­crease it once more – in De­cem­ber. That would be a full per­cent­age point in quar­ter in­cre­ments for the year.

4

Cur­rent events im­pact the Fed’s de­ci­sion.

Right now, the big story is trade pol­icy be­tween the U.S. and China. Mar­kets re­act around the world. That im­pacts the Fed’s de­ci­sion on whether it in­creases rates and how quickly.

5

There is no need to panic, but call your lender.

Farm­ers with long-term fixed mort­gages are locked in, but cus­tomers on ad­justable-rate loans get­ting ready to ad­just can see a pretty sig­nif­i­cant in­crease.

It comes down to the terms of your loans. Make sure you un­der­stand your loan agree­ments. Talk to your lender this fall. If you were us­ing short-term money that was very in­ex­pen­sive two or three years ago, you may look at that dif­fer­ently as the short-term rates in­crease.

6 Don’t change plans overnight.

If your busi­ness plan calls for ex­pan­sion, stick with it. Don’t make de­ci­sions based only on in­ter­est rates. In­ter­est ex­pense is only one of the costs to man­age.

7 This is not your grand­fa­ther’s 1980s Farm Cri­sis.

In the 1980s, high in­fla­tion drove in­ter­est rates. That is not the case to­day. The longterm out­look for in­fla­tion to­day is about 2%, but you never know what the fu­ture will hold.

8 Watch the Fed.

It con­trols the overnight fed­eral funds rate and it gives a lot of in­for­ma­tion on those longer-term views. That can re­ally help you un­der­stand what the econ­omy is do­ing and how it could af­fect agri­cul­ture. The two things the Fed fo­cuses on are max­i­miz­ing em­ploy­ment and keep­ing in­fla­tion around 2%. We are there with full em­ploy­ment and 2% in­fla­tion. The Fed is man­ag­ing that short-term rate in or­der to keep those things in bal­ance.

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